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Scope economies, entry deterrence and welfare

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  • Cesaltina Pacheco Pires

    ()
    (CEFAGE-UE, Departamento de Gestão, Universidade de Évora, Portugal)

  • Margarida Catalão-Lopes

    (CEG-IST, Instituto Superior Técnico, Technical University of Lisbon)

Abstract

This paper develops a model where the incumbent may expand to a second related market so as to signal the existence of scope economies and deter potential entry. We show that the incumbent only expands to another market when scope economies are large enough. Thus expansion is indeed a signal of larger economies of scope and, for certain parameter values, it leads to entry deterrence. We show that the perfect bayesian equilibrium may involve entry accommodation, entry deterrence or a mixed strategy equilibrium. We investigate the welfare implications of prohibiting an entry deterrent expansion. In our model, such prohibition would always decrease consumer surplus. The welfare impact of preventing entry deterrence is ambiguous but negative for many parameter values.

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Bibliographic Info

Paper provided by University of Evora, CEFAGE-UE (Portugal) in its series CEFAGE-UE Working Papers with number 2012_11.

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Length: 27 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:cfe:wpcefa:2012_11

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Related research

Keywords: Scope economies; signalling; entry deterrence.;

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References

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  1. Cabral, Luís M.B., 2009. "Umbrella branding with imperfect observability and moral hazard," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 206-213, March.
  2. Cesaltina Pires & Sílvia Jorge, 2012. "Limit pricing under third-degree price discrimination," International Journal of Game Theory, Springer, vol. 41(3), pages 671-698, August.
  3. Pedro Cantos-Sánchez & Rafael Moner-Colonques & José J. Sempere-Monerris, 2003. "Competition enhancings measures and scope economies: a welfare appraisal," Investigaciones Economicas, Fundación SEPI, vol. 27(1), pages 97-123, January.
  4. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
  5. Eaton, B Curtis & Lipsey, Richard G, 1979. "The Theory of Market Pre-emption: The Persistence of Excess Capacity and Monopoly in Growing Spatial Markets," Economica, London School of Economics and Political Science, vol. 46(182), pages 149-58, May.
  6. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-59, March.
  7. Pil Choi, J., 1997. "Brand Extension as Informational Leverage," ISER Discussion Paper 0451, Institute of Social and Economic Research, Osaka University.
  8. Banker, Rajiv D. & Chang, Hsi-Hui & Majumdar, Sumit K., 1998. "Economies of scope in the U.S. telecommunications industry1," Information Economics and Policy, Elsevier, vol. 10(2), pages 253-272, June.
  9. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  10. Kessides, Ioannis N. & Willig, Robert D., 1995. "Restructuring regulation of the rail industry for the public interest," Policy Research Working Paper Series 1506, The World Bank.
  11. Cabral, Luis M B & Riordan, Michael H, 1997. "The Learning Curve, Predation, Antitrust, and Welfare," Journal of Industrial Economics, Wiley Blackwell, vol. 45(2), pages 155-69, June.
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